Legal Issues Related To The Reform Of China's Foreign Exchange System-A Financial Globalization Perspective

Given the advanced development of financial globalization, all nations worldwide are increasingly interconnected both economically and financially. However, it's also increasingly evident that the financial globalization is a"double-edged sward". Since the advent of the 21st century, the global imbalance has gradually worsened. Notably, the global financial crisis triggered by the sub-prime mortgage crisis in the U.S. in 2007 is evolving into a deeper crisis. Against this background, the reform of China's foreign exchange system is facing a unprecedented challenge. On one hand, with the emergence and spread of all kinds of protectionist policies and opinions in major western developed countries, the discussion and allegation surrounding the international legality of China's foreign exchange system impose great international pressure on our nation. On the other hand, given the lack of effective restraint the current international monetary system has on issuing countries of reserve currencies, these issuing countries excessively issue currencies in order to spur their domestic economic growth, which makes management and safeguard of the national foreign currency reserves a new topic for foreign exchange system reform among many emerging market countries.This article mainly explores the international legality of our nation's foreign exchange system and the reform thereof so as to objectively evaluation the conformity level of major aspects of our nation's foreign exchange system with international rules. The author also proposes his suggestions on the major aspects of our nation's foreign exchange reform and creation of external legal framework against the background of financial globalization and international financial crisis from the perspective of relevant international laws (including the trend of law-making for international laws currently under drafting). This article consists of 240,000 words in total and the following chapters:Chapter One discusses the legislative driving force behind China's reform on its foreign exchange system in the financial globalization. Section I analyzes the forms of financial globalization and its connections with international financial crisis. It's pointed out that the current international financial crisis we face is actually a byproduct of the financial globalization and there is certain causation between the two. Section II analyzes the impact and influence on the rights of all nations to regulate foreign exchange, the sovereignty over foreign exchange rate, and other aspects of the currency sovereignty. Building on this analysis, the author submits that to increase the independence of our nation's foreign exchange policy and maintain our country's currency sovereignty in the financial globalization are the internal legislative driving force behind deepening our country's foreign exchange reform. Section III first reviews the progress of market-oriented reform of our country's foreign exchange system since 1990's and briefly summarizes the main pressures of international laws our country's foreign exchange system felt in recently years. It concludes that our country's foreign exchange system faces the duel challenges of IMF rules (especially the rules on currency manipulation, open-up capital items, and sovereign wealth fund) and WTO rules (especially the anti-subsidy rules) on the plane of international law. It then proposes that the international law pressure on all aspects of foreign exchange system constitutes the external legislative driving force behind the reform of our country's foreign exchange system.Chapter Two explores the jurisdiction over international disputes on currency exchange rates. There is great controversy among domestic and foreign scholars over which international organization or organizations have competent jurisdiction over disputes on Renminbi exchange rates. Therefore, it's necessary to specifically discuss the jurisdiction over international disputes on currency exchange rates under international laws before the exploration on merit issues. Section I demonstrates IMF's jurisdiction over international disputes on currency exchange rates from the perspective of member nations'substantive and procedural obligations on exchange rates within the IMF framework. The author further pointed out the limitations of IMF as the venue for resolving international disputes on currency exchange rates. Section II first comments on the different views held by domestic scholars regarding whether WTO has jurisdiction over international disputes on currency exchange rates. It further lays out the Renminbi exchange rate's potential effect on trade by analyzing the general jurisdiction of WTO's dispute resolution mechanism and Article 15 of GATT. It is concluded that WTO's dispute settlement body may interpret Renminbi's exchange rate mechanism as"trade-related foreign exchange measures"and so exercise its jurisdiction over disputes on Renminbi exchange rate. Section III discusses the division of competencies and collaboration on jurisdiction over disputes on exchange rates and explores our country's defense theory in a WTO dispute related to Renminbi.Chapter Three explores the legal issues on Renminbi exchange rate's formation mechanism within the WTO framework. Among the many international law allegations against Renminbi exchange rate mechanism from a WTO rules perspective, the most controversial is the"foreign exchange subsidy issue."Therefore, Section I responds to this issue and concludes that the claim that Renminbi exchange rate constitutes prohibited subsidies is not persuasive after exploring the tests of prohibited subsidies under the SCM treaty and the practice of WTO dispute resolution. In addition to the prohibited subsidies, western countries try to demonstrate the illegality of China's foreign exchange mechanism under WTO from the perspectives of most favor nation treatment, national treatment, quantity control, non-violation complaints or other aspects. Section II analyzes each of these major claims and concludes that all these claims fail to justify themselves. Section III, by applying the WTO rules, analyzes the illegality under WTO framework of unilateral trade restriction western countries intend to impose against Renminbi exchange rate. It's further pointed out that once China encounters trade restriction measures adopted by certain countries against Renminbi exchange rate, China can contemplate to make a claim against the relevant WTO member nations to defend our country's legitimate rights in the WTO system.Chapter Four discusses the legal issues for Renminbi exchange rate's formation mechanism under the IMF framework. Section I firstly reviews the evolution of the mechanism of surveillance over exchange rate policies and makes comments on this from a legal point of view. It then mainly discusses the legal defects of IMF's 2007 new decisions on surveillance over exchange rate policies after analyzing the background of the decisions'promulgation and the major revisions on the original decisions on surveillance over exchange rate policies. Section II first clarifies the tests for"currency manipulation"prohibited by IMF (i.e. the special currency manipulation) and distinguishes between the tests for currency manipulation and the measurement index for exchange rate. It concludes that the key in determining whether the Renminbi exchange rate mechanism constitutes currency manipulation resides not in whether Renminbi is under evaluated or has fundamental misalignment but instead in whether there exist intents prohibited by IMF in our country's formulation of its exchange rate policies. After studying the macro economic background based on which our country formulated the exchange rate policies since 1990's, it concludes that our country has fairly adequate argument to prove that our exchange rate policies do not constitute currency manipulation prohibited by IMF agreement. Section II further elaborates on the differences and connections between the violation of IMF's exchange rate guiding principles and the violation of IMF's legal obligations. It then proposes that the possibility that IMF deems our country as violating IMF's legal obligations is very small if we can strengthen the dialogue and consultation with IMF, given IMF's shift of focus from global imbalance to global financial crisis. Section III, building on the foregoing elaboration on IMF's mechanism of surveillance over exchange rate policies, proposes the short-term and long-term goals for Renminbi's exchange rate mechanism from the perspective of global financial crisis. It's concluded that in the current economic situation, Renminbi's exchange rate mechanism should be stable at its core without appreciation of depreciation by a large margin.Chapter Five discusses the legal issues on the open-up of capital items. Section I analyzes the international obligations for the open-up of capital items within the IMF and WTO legal frameworks respectively. It concludes that the progress of our country's open-up of capital items does not violate international obligations after studying the status quo of our country's open-up of capital items and financial industry and further proposes some suggestions on the steps for China's to open up of capital items and the improvement of relevant systems in the global financial crisis. Section II introduces the major legal experiments in the progress of our country's open-up of capital items in recent years, with focus on such milestones in our country's open-up of capital items as the qualified foreign institutional investor (QFII) system and the qualified domestic institutional investor (QDII) system. It also makes legal comments on the experiment of"Hong Kong Shares Express"and recent amendments to Foreign Exchange Regulations. After that, it proposes suggestions on how to improve the regulations of capital items.Chapter Six discusses the international legal issues for sovereign wealth funds. Section I surveys the reforms of the management of foreign exchange reserve by recent emerging market countries and petroleum exporting countries and the evolution history of sovereign wealth funds. It analyzes the definition and classification of sovereign wealth funds by applying relevant international rules and mainstream academic views. It then clarifies the development of Chinese sovereign wealth funds and its importance for our country's foreign exchange system reform. It then points out the risks faced by our country's sovereign wealth funds. Section II explores the international rules bearing on sovereign wealth funds. Due to the integrated idiosyncrasies of international laws'application to sovereign wealth funds, the international laws on sovereign wealth funds are extremely complex. With respect to multilateral rules, this section mainly introduces the major controversies in the international community on the law-making venue and substance of international laws for sovereign wealth funds. It then introduces the thrust of relevant multilateral rules or legislative proposals with respect to the codes of conduct for sovereign wealth funds and the receiving countries. Regarding unilateral legislations, this section introduces the legislations by the U.S and European Union related to sovereign wealth funds. Based on these results and dynamics of legislations, this article proposes relevant suggestions for China to respond to the international rules on sovereign wealth funds and the strategies for China's participation in the drafting of international laws in view of the impact of the international financial crisis on the international law-making for sovereign wealth funds. Section III mainly surveys the codes of conduct of sovereign wealth funds and the latest relevant international laws. Based on such codes of conduct, this section then proposes the legal actions in developing our countries'sovereign wealth funds.Chapter Seven discusses the financial globalization and the external environment of our country's reform on its foreign exchange system. A major part of the international law pressure encountered by our country's reform on its foreign exchange system is rooted in the unreasonable international monetary order. In addition, in the face of international financial crisis, the reform of international monetary system has become an inevitable trend. In order to better exercise our country's currency sovereignty and independently reform our foreign exchange system, our country should actively participate in and push forward the reform of the international monetary system so as to create an amicable international environment for our reform on foreign exchange system in the long term. Section I summarizes the main legal defects in the current international monetary system, especially the shortcomings of the current international monetary system and its inherent connection with the international financial crisis, after a review of the evolutionary history of the international monetary system and the legal framework of the current international monetary system. Section II points out that the international financial crisis has provided a good opportunity to reform the current unreasonable international monetary system. It also proposes suggestions relevant to this reform from the perspectives of basic principles, the institutional governance, the pluralism of international monetary system, and so on and anticipates that this reform can bring an amicable international environment for our reform on foreign exchange system.